It doesn’t take an expert to know C4ISR has entered a new era. All you need is a quick look at recent news headlines.

Navy SEALS kill Bin Laden in precision mission. Intel surveillance aids Libyan rebels. Satellites monitor humanitarian crisis in Africa. Unmanned drone takes out terrorist leader. Mobile communications improve hurricane response.

In every case, the story behind the story is not just C4ISR, but a new and improved C4ISR, with capabilities that continue to reshape the conduct of warfare and drive the convergence of defense and intelligence operations. This new C4ISR is also finding wider applications in the civilian sector, from aiding homeland security and law enforcement to improving public health and managing the environment.

Expectations are high for increased levels of government funding for C4ISR. The defense budget accounts for most of this funding. As this story was written, Congress was pursuing deep cuts in defense spending, and President Obama announced the withdrawal of U.S. troops from Iraq by the end of the year. Nevertheless, a recent report from Frost & Sullivan indicates that C4ISR applications will maintain a stable growth rate.

Budgets for C4ISR could take a short-term hit, and the focus may switch to doing more with existing systems and platforms. But C4ISR has proven too powerful and too cost-effective a mission resource to under-fund. Consistent with opinions voiced by many experts in the field is industry analyst Jim Fallon’s statement in the July 18 Microwave Journal that  “if we have learned any lessons from military operations in Iraq and Afghanistan, including operations around the world as part of the global war on terrorism, it’s the compelling need for a robust C4ISR capability for our warfighters.”

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From analyzing aerial image intelligence for special operations missions over Vietnam to integrating 15 subsidiaries into a coherent whole: Duane Andrews, head of the $1.5 billion defense technology powerhouse QinetiQ North America, excels at taking the long view. With more than 10 years’ experience in the military and government—and more than 20 in business—he’s seen federal contracting from all sides, and applied what he’s learned to push both SAIC and QinetiQ into rapid growth.

For a person with a low-key demeanor, Duane Andrews has a knack for catching powerful people’s eyes. A colonel he’d worked with pulled him from the Pentagon to the U.S. House of Representatives Permanent Select Committee on Intelligence. Vice President Dick Cheney, noticing Andrews’ grasp of military intelligence budgeting issues, tapped him to become assistant secretary of defense, command control communications and intelligence/chief information officer in the Pentagon. And most recently, longtime defense expert Philip Odeen pointed to Andrews when QinetiQ needed someone to operate its North American arm.

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More than one in four of the nation’s bridges are either structurally deficient or functionally obsolete.

There are more than 4,000 deficient dams in the United States—and for every dam that gets repaired, nearly two more are declared deficient.

America’s drinking water systems face an annual shortfall of at least $11 billion to replace aging facilities and to comply with federal water regulations.
The American Society of Civil Engineers’ 2009 Report Card for America’s Infrastructure has some scary numbers—and in two years, the outlook hasn’t changed much. Neither has the reaction.

“We all realize that we’ve got a problem. But we’re not aligned to a solution,” said Mark Gerencser, executive vice president at Booz Allen Hamilton and a longtime advocate for infrastructure solutions, particularly in what he calls the three “lifeline” areas: transportation, water and energy.

Gerencser’s stances on infrastructure have gained attention in the federal contracting world and the mainstream—he was quoted in Thomas Friedman’s latest book, That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Come Back. Gerencser is one of a crop of infrastructure thought leaders who are getting more notice as the contractor focus shifts from defense spending to what we can do right here.

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To find some of the most forward- looking CIOs in the country, check the government contracting world first. In contracting companies, you’ll find CIOs working at a strategic level in areas from budgeting to business development. They’re fully owning the “chief” title—and their places at the executive table.

What’s special about the government contracting CIO that made this leap forward possible? The answer lies in a government contractor’s unique position as both enterprise and client-service provider. The CIO holds the key to valuable resources: IT functions critical not only to the company itself but highly in demand from contracting clients.

This is in contrast to many commercial corporations, where IT is largely seen as an internal service and CIOs are still struggling to get out of the “support function” role. As recently as this autumn, an essay in Forbes magazine itemized reasons why the decades-old call for CIOs to move from “back room utility” to the business strategy table couldn’t get any traction.

But in the contracting world, wearing two hats—company support and client service—benefits the CIO as well as the company itself.

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But, what happens when the three main drivers of military demand – threats, politics and the economy- all all stuck in second gear?

With the economy, defense contractors lose either way, Thompson writes. If a solid rebound of business activity occurs, defense spending will still remain flat and investors will leave defense stocks to earn higher returns.

If the economy continues to stall, that flattening may turn into more serious spending reductions and fewer contracts.

The appeal of low tax rates and large cash holdings can only appease investors for so long, said Thompson.

“Defense executives need a new paradigm for how they deploy capital” to the respond to new market realities, Loren writes, as “policymakers are more interested in getting bargains than helping industry make profits.”

Some argue that defense contractors will respond by divesting and spinning-off some operations and by making other moves to rally around core operations.

Thompson disagrees, and argues that the future defense landscape will actually lead to diversification, not consolidation.

Defense contractors, he contends, will actually begin to fill into growth areas that are fueled by federal policy, but are also driven by substantial civilian and commercial demand.

He identifies General Dyanmics‘ recent $960 million acquisition of healthcare IT provider Vangent as an indication of the kind of diversifying acquisitions and financial realignments that will define the landscape.

He also recently noted that Lockheed Martin has established a new executive post to pursue cyber contracts as the company has recently streamlined its information technology operations to center on networks, information services and software.

“As frustrations mount with the tenor of government-industry relations, almost all of the big defense contractors will probably move to reduce their military exposure,” he says.

“The information revolution has made even Raytheon a pretty complicated story.”

Ultimately, defense firms cannot hold tight to their core business and hope to retain the same margins they have historically generated. “Cutting costs… will only work for so long” in a world where there are increasing success stories with ”a foot in both doors.” We’ll see how it plays out.

In gathering this overall perspective, one thing quickly becomes clear: It’s a tough environment out there. Here’s how investment banker Bob Kipps, with Kipps DeSanto & Company, describes today’s federal contracting landscape: Like Death Valley and the Sierra Nevada mountains. “There are a couple of peaks—and a lot of valley,” he says. “There’s a lot of activity, but it’s focused in those areas that are peaking.”

This issue of GovConExec explores the peak markets. It’s true that the $1.5 trillion debt-reduction deal means smaller or flattened budgets, but analysts and participants alike see plenty of movement that is nothing less than tectonic.

Company executives are shifting energies toward the areas they believe offer the best returns: markets equipped to realize the benefits of increasing efficiency, reducing waste, and cutting costs.

And the debt bill’s emphasis on accountability only intensifies pressure on the sector. Jack Hughes, a leading government-contracting finance veteran with more than three decades’ experience, and a current “buy-side” M&A consultant for Altus Associates, stresses that “companies providing products and services will have to be extremely flexible and nimble.” He sees growth for “mid-size and large companies that can acquire other companies in areas government will continue to fund,” such as cybersecurity and healthcare.

While some companies will, of course, continue to pursue growth through innovation, today’s winners are not always those engaged in the development of the next technology breakthrough. Companies are looking more for a return on improvement than a return on investment.

Health IT’s major advantages, for instance, lie in its ability to eliminate redundancy and, in the long run, improve overall health and lower care costs. Companies in this market may not be turning unprecedented profits; but they’re churning up savings. And these savings add up—which is certainly advantageous to the the federal government, federal contractors, and the people both serve.

Finding the Five

The editors of GovConExec have analyzed movement in the market, reviewed economic statistics, and consulted those active in the government contracting sector, to identify five promising areas for peak performance:
1 Cybersecurity: Threats ramp up, spending gets tight, and aging tools and practices go down—these are the challenges in this fastest-growing sector. The surprise: People may matter more than systems, with skill at a premium.
2 Healthcare IT: Sweeping policy reforms drive opportunity here—and more companies are applying existing talent and capacities to this emerging and increasingly complex market.
3 Cloud computing: This technology innovation has become the workhorse of the federal world, solving problems, providing cost savings, and garnering advocates.
4 Mobility: From the citizen accessing federal data to the soldier using an iPhone in combat tactics, all computing is trending smaller, quicker, and mobile. Challenges—wireless access, interoperability, security—abound, but so do opportunities for solutions.
5 Rule of Law: Rebuilding a stable government and economy takes plenty of tools and talent—and contractors are gathering the who and the what needed to tackle the tough work of infrastructure and institutional development.

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For Vangent CEO Mac Curtis, what’s behind every process or solution in a government contract are people — people whose needs should be served with respect and efficiency.

Mac Curtis is a keen observer and a hands-on strategist, both qualities he brought to the fore in Vangent Holding Corp.’s pending $960 million acquisition by General Dynamics. But perhaps what this former civil engineer observes most acutely aren’t transactions and technologies, but people.

In environments ranging from business processes to health IT, Curtis has watched what people do and what they say, and noted the gaps where the two don’t always add up. He’s paid attention to how personalities make partnerships successful. He’s looked at the needs and values of people he grew up with and who he works with each day —civilian workers, veterans, active military. And he’s studied the behavior of his mentors — some of the best in the business world.

— Sara Wildberger

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GovConExec’s Selected Who’s Who List of Strategic Advisers, Investment Bankers and Private Equity Players.

It takes strong backs and deft hands to grow and move a company into a new market area—or even to beef up or align assets that a company already owns in a hot market.

Strategic advisers take a long-term look, helping companies to get three to five years ahead of the market with the right capabilities and technologies in place. They advise top management, investment bankers, private equity firms and other large investors, and are often relied upon to provide a high level assessment of government spending trends.

Investment bankers help companies navigate market shifts and consolidation—identifying attractive acquisition targets and potential buyers when companies seek to divest assets, providing merger and acquisition support and valuation services, and raising capital in the public or private markets.

Private equity firms have been very active in the strategic purchase of companies in the GovCon market, providing capital to help companies better leverage their existing strengths and continue to grow.

We’ve witnessed a realignment of the market as companies seek to tackle their growth targets by entering or further penetrating markets where there is demand— and funding— for support to the federal government.

— Gerry Simone

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The new threats are all too familiar: worldwide and regional instabilities; domestic and foreign terrorism; violent religious extremism; rogue nuclear states; struggles for scarce resources (such as energy and water); pandemics; cyber attacks against civilian and military targets; piracy at sea; and on up to nuclear Armageddon.

We must have an extremely flexible and responsive governmental and industrial capability in order to handle these missions in an affordable fashion — a capability we currently lack.

We can begin by enhancing cooperation. First, at the national level, we should create incentives for multiagency activities — combining “soft power” (of State, AID, etc.) with the “hard power” of the Defense Department. Then, since none of the future security problems can be solved by a single nation acting alone, we must shift to multinational solutions.

The most obvious — and most challenging — international collaboration would be with China. We must make every effort to work with them as a partner, not as a future adversary. Together, the two leading economic and (in their case, future) military powers in the world must work together to address these global issues.

Finally, the U.S. government must change the way it does business. We can’t hope to get increased national security capability at a reduced cost without reforming the full acquisition process for military goods and services (i.e. what we buy, how we buy, who does the buying, and from whom we buy).

— Jacques S. Gansler, Ph.D.

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Decades after leaving fifth grade, Ed Swallow still remembers the person who had a pivotal role in shaping his future career.

A student who tested ahead in math and was already reading Scientific America at a young age, Swallow, a vice president of business development at Northrop Grumman’s Information Systems Sector, who oversees cyber strategy, capabilities and technologies for the company’s civil programs, credits his teacher — Mr. Russo — with encouraging him to become an engineer.

“Almost everybody who went into a technical career had somebody who influenced that decision,” Swallow said. “For me, it was Mr. Russo.”

— Lauren Maffeo

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